Unsustainable varieties of capitalism along the Thailand ... · Unsustainable varieties of capitalism along the Thailand–Malaysia border?The role of institutional complementarities

Unsustainable varieties of capitalism alongthe Thailand–Malaysia border? The role of institutionalcomplementarities in regional development

Edo Andriesse & Guus van Westen

Published online: 26 September 2008# The Author(s) 2008. This article is published with open access at Springerlink.com

Abstract This contribution aims to couple national institutional complementaritiesto issues of regional development and long-term sustainability in Southeast Asia’snon-core regions. A comparison is made of Satun in Southern Thailand and Perlis inNorthern Malaysia. Based on fieldwork data, the findings reveal that Malaysianinstitutional complementarities result from a key role of the state, leading topotentially ineffective forms of economic activity. On the Thai side, institutionalcomplementarities give free reign to entrepreneurs, but they are less conducive forinclusive regional development and addressing environmental concerns. Based onthe case studies, findings of a more general applicability highlight two additionalissues. First, balanced regional development requires a set of institutionalcomplementarities that integrates economic growth with distributional strategies.Second, more attention should be paid to the adaptability of institutional arrange-ments as they may actually “lock in” regions in an unsustainable developmenttrajectory in the long run, be it in economic, social or ecological terms.

Keywords Institutional complementarities . Regional development . Thailand .

Malaysia

Institutional frameworks have been recognised as an important factor in theexplanation of geographical variations in economic performance, complementingclassical notions of comparative advantages (Lane & Myant, 2007; Peng & Delios,2006; Whitley, 1999; Harriss, Hunter, & Lewis, 1995). The varieties of capitalism

Asia Pac J Manag (2009) 26:459–479DOI 10.1007/s10490-008-9107-2

E. Andriesse (*)International College, Khon Kaen University, Khon Kaen 40002, Thailande-mail: [email protected]

G. van WestenUrban and Regional research centre Utrecht (URU), Utrecht University, P.O. Box 80115, 3508 TCUtrecht, The Netherlandse-mail: [email protected]

approach, as elaborated by Hall and Soskice (2001), has introduced the analyticallypowerful concept of institutional complementarity: the simultaneous, interdependentand enabling character of bundles of two or more institutional arrangements that inthemselves yield specific comparative advantages and thus steer entrepreneurship,firm performance and economic development in a certain direction. Research inSoutheast Asian capitalist systems has also taken root in the last decade (for instanceHaggard, 2004; Doner, Ritchie, & Slater, 2005; Barlow, 1999). This article builds onthis line of work, with explicit attention to the sub-national level.

The aim of this contribution is twofold. First, we take the discussion ofinstitutional complementarities to the level of highly similar regions belonging todifferent countries, in a comparative empirical investigation of the economies of twoperipheral regions: that of Satun, a province of Thailand, and the neighbouringMalaysian state of Perlis. These areas have a similar physical geography, themajority of their populations is composed of Muslims of Malay descent, and bothregions shared a common history until a century ago. In 1909, the internationalborder was drawn between Thailand and what is now Malaysia, separating Satunfrom Perlis.1 Since then, both regions have experienced different economictrajectories that can essentially be explained by their belonging to two markedlydifferent national contexts. How have these differences impacted on regionaleconomic development and firm performance characteristics, and to what extent canthese be related to institutional complementarities “on the ground,” (i.e., in the specificcontexts of Perlis and Satun)? Second, beyond the specific cases of Perlis and Satunanalysed here, we will discuss the more general implications of our findings forregional development in non-core regions of Asia. What is the role of institutionalcomplementarities in economic performance? What perspectives do different modelsof management and governance offer? We will specifically consider distributionalaspects as well as longer-term sustainability.

The next section introduces the institutional approach in Southeast Asia, takingthe varieties of capitalism (hereafter VoC) approach as a starting point, but proposingsome amendments. This is followed by a brief discussion of methodology issues inwhich the Thai and Malaysian institutional complementarities are also introduced.Then, the specific characteristics of the two regions’ institutional frameworks areanalysed by means of a comparison of two industries that characterise economicactivity in the two study regions: Satun’s seafood industry, and Perlis’s constructionand real estate industry. The discussion of findings will then aim at derivingconclusions of a more general applicability.

National institutional complementarities in Southeast Asia

The VoC approach asserts that firms are the central organisations within each capitalistsystem. Hall and Soskice (2001) argue that in order to develop and coordinate core

1 During the Second World War the Japanese briefly transferred control over Perlis to the Thaigovernment. Perlis became a Malaysian State in 1957 when Malaysia gained independence from theBritish.

460 E. Andriesse, G. van Westen

competencies, firms must maintain relationships within five institutional spheres:industrial relations, vocational training and education, corporate governance, inter-firm relations and coordination vis-à-vis their own employees. Thus, each firmoperates in a complex environment with many institutional relationships, eitherformal or informal.2 Furthermore, the five spheres, or particular sets of institutionalrelationships, are closely interconnected. One type of relationship in one spherecalls for a corresponding arrangement in other spheres in order to be effective.Hall and Soskice (2001) have termed these sets institutional complementarities.Such complementarities are responsible for comparative institutional advantages andultimately specific varieties of capitalism.

It is regrettable that the VoC approach tends to focus exclusively on the dichotomybetween liberal market economies (LMEs), such as the USA and Britain, on the onehand, and coordinated market economies (CMEs), of which Japan and the “Rhineland”European economies are the best-known examples, on the other (Allen, 2004).Revealing the Western bias in much of the literature on economic systems, Tickelland Peck (1995) stereotyped Malaysia and the Philippines as cases of “primitivetaylorism,” notable for “taylorist labour processes with almost endless supply oflabour, bloody exploitation, huge extraction of surplus value, coupled with thepresence of dictatorial states and high social tension.”3 Such statements do little justiceto the specifics and the diversity of Asian economic systems, suggesting (perhapsunwittingly) that the non-Western world is an undifferentiated set of substandard andgenerally deficient institutional arrangements, vaguely but inadequately reflecting themodels of the part of the world that counts.

Therefore, in addition to considering the institutional spheres of the VoC approachwe aim to address two crucial issues in this study. Although the VoC approachconsiders economic power, it neglects political power, often viewed as highlyrelevant in Southeast Asian capitalist systems (Haggard, 2004; Gomez, 2002;Barlow, 1999). Leading economist Pranab Bardhan convincingly argues for theinclusion of political power in institutional economic analyses. In his view, powerrelations matter especially for understanding the distributive effects of institutions.Disabling institutions often survive because they serve the interests of thosepowerful enough to change them (Bardhan, 2005: 27–86). Land rights are a classicexample of institutional inertia due to power configurations. According to Carney(2004), commenting on the difficulties of industrial restructuring after the Asianfinancial crisis, “economic power has concentrated in the hands of a small number ofpolitically connected incumbents who are in a position to perpetuate their elitepositions and frustrate the entry of new agents into the economy.” Elsewhere,Schmidt (2003) has incorporated political power in her elaboration of the VoCapproach. She identified at least three varieties of capitalism: market capitalism

2 Here we follow North (1991): “Institutions are the rules of the game in society or, more formally, thehumanly devised constraints that shape human interaction. Institutions are generally divided into formaland informal institutions. Formal institutions are economic, political (and judicial) rules and contracts;informal institutions are informal codes of conduct, norms of behaviour and conventions.” Thus Northclearly separates institutions from organisations.3 See Bain et al. (2002) for a contemporary study of taylorism.

Unsustainable varieties of capitalism along the Thailand–Malaysia border? 461

(similar to LMEs), managed capitalism (similar to CMEs) and state capitalism inwhich firms and governmental authorities are the key organisations. Schmidtintroduced state capitalism to conceptualise French institutional complementaritiesbetween the 1950s and 1970s. In the Southeast Asian context, Jayasuriya (2004,2003) stated that domestic coalitions between economic and political actors andpolitically motivated side payments to less-favoured parts of the society compriseessential components of each national institutional framework. In sum, empiricalinstitutional research in Southeast Asia certainly requires the inclusion of thepolitical dimension, especially if one also wishes to derive policy implications.Moreover, power is important in analysing the position of peripheral regions withinnational (and global) space economies, as in our case.

Besides the neglect of political power, a further aspect unaccounted for in the VoCapproach is the often personal approach to conducting business that prevails in manydeveloping countries. Carney and Gedajlovic (2001) have thus distinguished personalcapitalism, in which ownership and control of firms are combined, while businesslinks and firm configurations are often patterned on kinship relations. Many ofSoutheast Asia’s major companies are conglomerates whose growth trajectories arebased on personal capitalist characteristics. And many of these conglomerates werefounded by ethnic Chinese (Gomez & Hsiao, 2003; Mackie, 1999; Suehiro, 1989).From the preceding discussion it is evident that capitalist systems can be analysed inseveral ways. This article proposes to embrace Hall and Soskice’s concept ofinstitutional complementarities, but without their singular distinction of an LME-CMEdichotomy. Instead our theoretical approach combines Schmidt’s (2003) typology ofmarket, managed and state capitalism and Carney and Gedajlovic’s (2001) notion ofownership and control and it takes into account the political dimension of institutionalarrangements (Bardhan, 2005; Jayasuriya, 2004, 2003).

Setting up the empirical cases

This contribution is concerned with the role of institutional complementarities inshaping economic development in peripheral regions of Thailand and Malaysia. TheThai-Malaysian border area (Figure 1) offers a promising setting for a comparativestudy on the role of institutional frameworks as it allows us to some extent to controlfor local factors. While we accept that no two regions in the world are identical, theirphysical geography, historical patterns and population characteristics are sufficientlysimilar to assume that divergence between the two regions since their separation in1909 is likely the result of differences in the national frameworks in which they havebeen incorporated. Our hypothesis is, then, that this difference in national contextentails different institutional conditions, encouraging specific directions of economicdevelopment in each region, while discouraging others. Most of these steeringinstitutional complementarities are likely to be defined at the national level, but ofcourse some may actually be locally embedded. In this respect Schamp (2003) hasargued that the debate on the spatial boundaries of economic institutions has justbegun and hence, it is highly plausible to include national institutions in analyses ofregional development.


Although both Malaysia and Thailand belong to the middle-income category,patterns of economic growth and institutional frameworks are by no means the same.Table 1 shows that Malaysia is clearly the more advanced country: its GNI and HDIper capita are substantially higher and have increased faster; agriculture is no longerthe major sector of employment and its economy appears more open; or at least, it hasa highly open export manufacturing sector. Reflecting these differences in nationalcontexts, the two study areas display different economic profiles. Whereas Satunremains essentially rural, with more than half of its income and employment based on

Figure 1 Map of Satun and Perlis. Map produced by Geomedia, UU based on various sources


agriculture and fisheries, Perlis boasts a rather diversified economy with services asthe lead sector along with some manufacturing, including foreign plants (Table 2).Remarkably, construction emerges as a key component of the Perlis economy,suggesting considerable dynamism. In contrast, Satun’s non-primary economicactivities are limited to a small services sector based in its capital Satun Town, aswell as some processing of primary products, notably a large tuna canning plant.

Table 3 compares the institutional and political aspects of the Thai and Malaysiannational economies, based on an extensive list of sources. Similar to the variety ineconomic performance, many differences in national institutions can be observed. Amajor difference is the role of the private and public sector. In Thai capitalism, firmsoccupy a more strategic position, whereas governmental authorities are very activein Malaysia. This is confirmed by the government expenditure indicator in Table 1.Another striking difference is the relation between ethnicity and economicinstitutions. Since 1971 the Malaysian government has actively sought to enhancethe economic position of the Malay (Bumiputera) majority relative to the ethnicChinese and ethnic Indian minorities, most notably through the so-called neweconomic policy (NEP). Ethnic Chinese businesspeople also account for much of theeconomy of Thailand, but this has not resulted in similar ethnic-based policies.Overall, in Schmidt’s (2003) terminology Thailand has a managed variety ofcapitalism, with some features of a market variety, whereas Malaysia is closer to astate variety of capitalism. How these varieties impinge upon our empirical caseswill be analysed in the following.

To accommodate the theoretical considerations discussed in the previous section,we adhered to the following set-up. With respect to private sector development weanalysed inter-firm relations, corporate governance (specifically access to finance),and human capital formation; the last-mentioned as a proxy for Hall and Soskice’sinstitutions pertaining to industrial relations. Given the expected role of personalcapitalism (especially significant in the case of Thailand) and robust stateintervention in Malaysia (Table 3), political power and personal capitalism areincluded in the analysis, as already discussed.

Table 1 Socio-economic differences between Thailand and Malaysia.

Malaysia Thailand

1975 2004 1975 2004Total population (millions) 12.3 24.9 41.3 63.7HDI index 0.616 0.805 0.615 0.784GDP per capita rank (ppp)–HDI Rank −4 −9Labour force (%) 1990 2005 1990 2005Agriculture 26 15 64 43Industry 20 20 10 15Services 54 65 26 42Government expenditure (% of GDP) 13.8 13.1 9.4 11.8

2000 2004 2000 2004GNI per capita (atlas method, US$) 3,390 4,520 2,010 2,490Total trade (% of GDP) 199.5 195.7 107 129.4Total external debt (% of GNI) 50.6 46.6 66 32.4

Sources: UNDP, 2006; ADB, 2006.


The next two sections will elaborate on ownership and control, inter-firmrelations, access to finance, human capital formation and the political dimension ofinstitutions within two industries: the seafood industry in Satun and the construction/real estate industry in Perlis. It may seem odd to select two fairly different industriesfor a comparative analysis. Differences in organisation and characteristics of the twoindustries do indeed impose limitations on comparison. The reason why they havenevertheless been selected is that both industries clearly reveal the way nationalinstitutional complementarities affect patterns of regional development. Thus,seafood in Satun and construction in Perlis constitute the emblematic industries oftheir respective regions, which reveal key features of the two models under scrutiny.

Data collection and subsequent analysis of the two regional economies were notlimited to these two industries. The data base covers overall economic activity inSatun and Perlis. Data are drawn from two main sources. First, a firm surveyconducted between July 2004 and December 2004 was concerned with mappinginstitutional relations, including ownership and control features, networking patterns

Table 3 Thailand’s managed variety and Malaysia’s state variety of capitalism.

Thailand Malaysia

Political economy Agriculture also successful ininternational markets; governmentis enabler, facilitator

Clear dual political economy:globalized enclaves with domesticprotected markets; government isinterventionist, dirigiste

Domestic coalitions Sino-Thai entrepreneurs activein both domestic and internationaleconomy; entrepreneurs often activein politics

Nurturing of Bumiputera businesselite, closely related to UMNOjoint ventures between ethnic-Chinese and Malay firms

Side payments Relatively moderate Huge and many different kindsInter-firm relations Competitive plus...cooperative,

mutually reinforcing and networked basedState led state mediated

Access to finance Major role for banks Major role for state

Sources: Case, 2005; Gomez, 2002; Hewison, 2005; Jomo, 2003, Krongkaew, 1999; Mackie, 2003; Pasukand Baker, 2004; Schmidt, 2003; Wingfield, 2002.

Table 2 Basic indicators of Satun and Perlis.

Satun Perlis

1990 2004 1990 2004Total population 227,000 270,000 188,000 218,000Islam (%) 67 68 79 84Labour force (%)Agriculture 74 57 33 15Industry 13 10 22 24Private services 10 26 21 34Public services 4 7 24 27Per capita GRP in US$ 1,630 2,589GRP in US$ (million) 439.8 564.4

Sources: Auditor General, (2006), Department of Statistics (1993/2005).


of firms (supplies, customers, competitors, civil servants), the nature and frequencyof these relations (contracts, meetings, role of business associations) as well asaccess to finance (role of banks, government loans, shareholders and other intra-firmsources). A total of 44 firms were approached in Satun (of which 6 refused tocooperate), and 48 in Perlis (of which 9 refused). The businesses included in thestudy represent all large and a sample of medium-sized companies. In Satun, firmsfrom the latter group, defined as having a registered capital between Thai Baht 1million and 15 million, were randomly sampled from a comprehensive digital list ofthe Department of Commerce. Since there is no single reliable register of all firms inPerlis, sampling there had to be carried out from a list derived from several sources.In order to assure coverage of Bumiputera as well as ethnic Chinese firms, lists fromboth the Malay and Chinese Chambers of Commerce were used. In addition, thelistings of Malaysia’s Company Commission (SSM) and the State EconomicDevelopment Corporation were obtained to complement our sampling frame. InPerlis medium-sized companies were defined as employing between 5 and 300workers.4 Answers were then processed by the SPSS software package for simplestatistical analyses. Very small firms were excluded from the research.

Second, between February 2006 and June 2006 semi-structured and openinterviews were conducted with a variety of organisations and individuals:representatives from associations, national and regional governments, bankmanagers and journalists. In Satun, 29 key informants were interviewed, and 33 inPerlis.5 In both Satun and Perlis firms were approached in person. In virtually allsurveys and interviews in Satun interpreters were used. In Perlis 50% of the surveysand interviews were carried out without the aid of an interpreter, as managers andowners of larger firms were generally able to communicate in English. Some 25% ofthe data gathering took place with a Bumiputera interpreter and the remaining 25%with an ethnic Chinese interpreter (mostly Hokkien). Interviews took around onehour on average and predominantly served to cross-check findings from the survey,and gauge backgrounds, motives and interests. The interviews also dealt with aspectsof human capital formation (training of workers and education policies) and thepolitical dimension of institutions (networks involving politicians and entrepreneurs,commercial interests of politicians, the conduct of tender processes). Of course, theuse of interpreters may lead to slight distortions of the information gathered.Interviewees were usually very cooperative, but several respondents in Perlisshowed some reluctance to disclose information that was deemed sensitive. Theinterviews were analysed through identifying keywords, allocation answers to thekeywords and then comparing the answers. For a full outline of the researchmethodology, see Andriesse (2008).

4 Due to differences in registration of firms, size classification methodology had to vary somewhatbetween the two countries.5 Some of these interviews were conducted outside the research areas: Hat Yai and Bangkok for the Satuncase and Alor Setar and Putrajaya for the Perlis case. In recent years, many governmental authorities havetransferred their offices from Kuala Lumpur to Putrajaya.


Institutional arrangements in the Satun seafood industry

The seafood industry

Thailand is a well-known exporter of seafood, harvested from fisheries as well asaquaculture. In 2004 Thailand ranked 3rd worldwide in terms of export value, and 5th interms of volume; an improvement from 8th and 11th positions respectively in 1984(FAO, 2007). Perhaps even more remarkable was the emergence of a Thaimultinational, the Charoen Phokpand Group, as a leading actor in organising theglobal value chain for shrimps (Goss, Burch, & Rickson, 2000; Pananond & Zeithaml,1998). The largest concentration of fishery activities is still based in the Bangkok area.However, unsustainable practices especially in shrimp aquaculture have prompted theindustry to gradually spread south along the Gulf of Thailand, and further on theAndaman Coast, in the classical pattern of a moving resource frontier.

As the southernmost province flanked by the Andaman Sea, bordering Malaysia,Satun was one of the last parts of Thailand to be included in this commercial fishery.Although it is a small and remote province, with a population of approximately270,000, it is not a particularly poor one. It ranked 20th out of 76 Thai provinces onthe UNDP Human Achievement Index in the 2007 issue (UNDP, 2007). Thailand’sspace economy shows a concentration of manufacturing and modern serviceindustries in the Bangkok area, while the provinces serve mostly as suppliers ofraw materials. Satun can be seen as a resource frontier in this constellation. Latexextraction from rubber trees and ocean fishing are by far its most importantindustries. The former is mainly carried out by smallholders and a single latexprocessing firm (most of the processing takes place in neighbouring SongkhlaProvince). The fisheries industry in Satun has seen the rise of a seafood cluster (agroup of spatially concentrated and closely linked firms), consisting of boat owners,fishermen, fish processing establishments, transportation firms, ice factories andsupport activities. Satun has two fishing ports: Tammalang, just south of SatunTown, and Pak Bara near La-ngu. Satun’s two ports are responsible for 25% of allfish handled along Thailand’s Andaman coast (Department of Fisheries, 2005). Theprominence of fisheries in Satun is reflected in the composition of its gross regionalproduct (GRP) and the labour force. The share of fisheries in Satun’s GRP excludingprocessing and related activities was 20% in 2005, and approximately 20% of thetotal labour force work in the fisheries cluster (NESDB, 2007; NSO, 2005).6

Interestingly, the fisheries industry on the Malaysian side of the border issubstantially smaller than in Satun, in spite of similar resource conditions.

Why has this seafood cluster emerged in Satun? It is clearly a private-sector-driven industry that in its rise reflects Satun’s resource base as well as the role ofnearby Hat Yai as the economic centre for the south of Thailand. Seen from Hat Yai,Satun is an attractive new location for the seafood industry, tapping into relativelylittle used resources when fisheries on the Gulf of Thailand coast had already beenwell established (e.g., Pattani). Businesspeople from Hat Yai and their relatives

6 The latter percentage is based on estimation: summing up the number of fishermen and the number ofemployees working in firms of the seafood cluster.


played a considerable part in the creation of the Satun seafood cluster. Moreover,Satun’s Muslim Malay population is prepared to do the hard work required offishermen at sea, an occupation less popular among Thai populations further north.

Institutional arrangements

What institutional arrangements drive the Satun seafood cluster and do institutionalcomplementarities affect its performance? In terms of ownership and control, it isstriking that all surveyed firms within the cluster are owned by Sino-Thaibusinesspeople—this in contrast to the Muslim majority in Satun’s population. Inseveral cases, one of the parents of the owner migrated from China, but most havelived in Thailand for generations. Typically, firms in the seafood cluster areindependent, not subsidiaries of other firms. Some have the legal form of limitedpartnerships (at least two shareholders), others are limited companies (a minimum ofseven shareholders). As a rule, all shareholders are relatives. A considerable number ofthese shareholding kin live in Hat Yai, the regional business hub. Management tasksare generally carried out by the owners themselves, as employees are not consideredimportant stakeholders. In this respect Satun fits the general Chinese family-basedbusiness pattern of personal capitalism: i.e., the coupling of ownership and controland an orientation towards shareholders and kin rather than (other) stakeholders. Theemployees, mostly Muslim Malays and migrants from Myanmar, are recruited for theirwillingness to work hard for low wages; personal ties do not play a significant role andlong-term commitments between employer and employee are not actively pursued.

The most prominent firm in the cluster and by far the largest firm in the provinceis Siam Tin Foods. It was established in 1986 by a Bangkok entrepreneur, introducedto Southern Thailand through his wife. He considered Satun a good location forseafood processing because of its abundance of seafood, labour and cheap land.Since then, the firm has grown to employ 1,300 workers, exporting canned fish toEurope and the United States. The firm has 10 shareholders in addition to thefounder-cum-managing director who holds 25% of the stock. Similar to Siam TinFoods, other entrepreneurs have moved in to take advantage of Satun’s comparativeadvantages. The second largest firm (100 employees) is a shrimp processingcompany owned by the mayor of Satun Town. His most important client is theCharoen Phokpand Group that orchestrates the extensive logistics necessary to getThai shrimps on dining tables all over the world.

The firm survey reveals highly informal, personal and networked inter-firmrelations. Firms at the start of the value chain have suppliers outside Satun(chemicals for an ice factory, equipment for boat owners) and clients in Satun(processing and distribution firms), whereas processing firms often have localsuppliers, but deliver to clients outside of the province (wholesalers and exporters).Suppliers and clients within the cluster rarely sign formal contracts, but deal witheach other on an informal and personal basis. The owner of an ice factorycommented: “I like to give suppliers and clients a present for Chinese New Year andthank them for their support.” The cooperation between this firm and a distributor isillustrative of the informal nature of inter-firm relations: “When we want somematerial from Bangkok ..., we ask them to transport material from suppliers [sic];Our clients agree, because they normally drive their trucks back to Satun empty.”


Cooperation among entrepreneurs is also facilitated through three local organisa-tions: the Satun Chamber of Commerce, the Sino-Thai Chong Hua Association andthe local Rotary Club. Moreover, kinship relations frequently facilitate businesscontacts. Hongyen Tammalang, for instance, a fish processing firm that also ownsboats, has as its most important client a relative in Chumphon Province. Overall,inter-firm relations fit into the so-called guanxi style of doing business (Li, 2007).Guanxi can be considered as a set of specific informal institutions, which enableentrepreneurship and in which personal connections are often key drivers. In fact,most entrepreneurs in Satun’s private sector are Sino-Thai who practise guanxi(Andriesse, 2006). Although inter-firm relations in Thailand are also driven bycompetition (Table 3), guanxi-style cooperation stands out in Satun, perhaps fosteredby the lack of interaction between the local business elite and the Muslim majority.

However central the family-based Sino-Thai private company may be to Satun’seconomy, it is complemented by relatively easy access to finance. According toCarney and Gedajlovic (2001), personal capitalism “has negative implicationsregarding a firm’s ability to raise financial capital.” This is the case in Malaysia, aswill be clarified in the next section, but in Thailand banking has greatly contributedto private sector development (Mackie, 2003; Wingfield, 2002). Hewison (2001) andSuehiro (1989: 110-172) have traced the rise of these Thai banks to successful Sino-Thai families able to build large financial conglomerates (some as spin-offs from ricemilling) with the support of the Thai bureaucracy and military leaders in the 1950s.Even in a peripheral province such as Satun many banks have opened a branch there.On average 58% of their transactions are related to personal banking, and 42% tocorporate banking.7 Indeed, a majority of the seafood firms mentioned banks as themain source of start-up capital. Financial risks are reduced by also relying onshareholders (read relatives). Furthermore, finance is sourced via networking in theassociations as presented earlier.

On the one hand the complementarity of guanxi institutions and relatively easyaccess to finance appears to benefit the growth of the seafood cluster, but on theother hand employees are to some extent excluded from participation. Sino-Thaientrepreneurs seem less committed to foster relations with workers by paying themgood wages (in fact workers from Myanmar often receive less than the minimumwage of US $88 per month (BOI, 2007)), or by providing social security or trainingto workers. As a consequence, employees lack incentives to invest in their jobs andhuman capital formation is limited. Moreover, few banks offer financial productsconforming to Islamic laws, which may well constrain private business developmentamong Muslims. As for the public sector, the Department of Fisheries and the FishMarketing Organisation offer some support and regulation services (safety andquality inspection, information supply, etc.), but are not directly involved in thedevelopment of the cluster, nor do they provide credit for private sectordevelopment. On the whole, the public sector is not much concerned with theinterests of Islamic workers and labour migrants from Myanmar. Thus the relativeneglect by the public sector contributes to the continuing economic exclusion of themajority population in the province.

7 Based on interviews with bank managers.


Finally, the political dimension of the institutional arrangements remains to bediscussed. Personal power networks in the seafood cluster evolve in two ways.Firstly, leading entrepreneurs may be consulted for policy advice. The managingdirector of Siam Tin Foods, for instance, acts as an economic adviser to theGovernor of the province. This enables him to obtain information and to coordinatematters relevant for his businesses. Secondly, the guanxi style of doing business hasa political dimension as many leading Sino-Thai entrepreneurs are active in theSatun Town Municipal Government. As already noted, the mayor owns a shrimpfarm, and a vice mayor and another member of the Satun Municipal Council (ayounger brother to the former mayor) own many fishing boats. Municipal politics isanother platform for the seafood entrepreneurs to coordinate business with eachother. Sino-Thai businesspeople are elected into municipal office as Muslims are nota majority in Satun Town. Ethnic-based voting explains why they cannot becomenational politicians. Members of Parliament representing Satun Province are alwaysMuslims, reflecting the population composition. Therefore, there are no effectiveentrepreneur-politician networks linking the province’s business interests withprovincial and national politics, as is the case in many other Thai provinces (Askew,2006; Nelson, 2005; Pasuk & Baker, 2004; McVey, 2000). The Satun Town Councilhas emerged as a substitute locus of political representation for Sino-Thaientrepreneurs, but it is unable to secure their interests. The Town Council does notoffer them access to decision making and budget allocations at the national level,which is far more important than what can be done locally.

Institutional arrangements in the Perlis construction and real estate industry

The construction and real estate industry

The second empirical case is the construction and real estate industry in Perlis, theMalaysian state bordering Satun. In contrast to Satun’s seafood cluster theconstruction and real estate industry is a purely domestic activity, not involvingexports. However, it can actually be seen as the key driver in the regional (state)economy. Construction and real estate have long been important in Malaysia’seconomy, particularly so in the beginning of the 1990s when then Prime MinisterMahathir, flush with success in export manufacturing and with revenues from oil andgas exports, initiated several “mega projects.” In the more sober period that followed,some projects were scrapped. However, the Ninth Malaysia Plan (2006–2010) hasrevived the construction industry as a key instrument of economic policy. This isspecifically notable in the small and relatively peripheral state of Perlis with apopulation of 210,000 of whom 84% are Bumiputeras and 10% ethnic Chinese. It isthus part of the Malay heartland of Malaysia: a state predominately populated by thepolitically powerful but economically less favoured Bumiputera population. As such,Perlis ranks among the less developed states. Nevertheless, Perlis is considerablybetter off than its Thai neighbours, as reflected in its per capita GRP, 59% higher thanSatun’s, and in a range of other indicators such as per capita number of hospital beds,teachers, private cars, and so on.


In stark contrast to Satun and perhaps surprising for a relatively rural andperipheral part of the country, the public sector is the main driver of the regionaleconomy. Public services in themselves are a backbone of the Perlis economy,engaging 27% of the total labour force. The importance of the construction and realestate industry is directly linked to the key role of the public sector. In 2004construction alone contributed 5.9% to GRP and employed no less than 10% of thetotal labour force—much more than corresponding figures for Satun at 2.2% and4.4% respectively (unfortunately, data for real estate activities are not available). Theprominence of the construction/real estate industry in Perlis is based on several largepublic projects, among which include schools, tourist facilities, highways and newoffices for the Perlis State Government. Recently, Perlis has embarked on a strategyto become a “knowledge state.” Several new schools and colleges were welcomed tothe state, the Northern Malaysia University College of Engineering (KUKUM) beingthe most important. As the Perlis Sate Government has few financial resources, theFederal Government funds virtually all projects.8 Private construction initiatives arerelatively unimportant.

The role of construction and real estate is not immediately obvious from thestatistics quoted. The point is that in Perlis, the state (federal and local) activelyintervenes in economic life in efforts to create new regional competitive advantagesin order to promote the position of the economically disadvantaged but politicallypowerful Malay population. This is in contrast to Satun, where private entrepreneurstake the initiative to exploit the existing comparative advantages in natural resource-based activities. Indeed, here we touch on the key feature of the regional economy,namely that it is essentially based on Malaysia’s extensive system of side paymentsto the economically less favoured Malay heartland. The level of income, welfare andservices enjoyed by the Perlis population has relatively little to do with its basicindustries and the market sector. In reality, the dynamism of the Perlis economy isgenerated by transfers from the Federal Government, funds channelled into aseemingly never-ending series of project ideas to promote this predominantly Malaystate. Whether it concerns a halal food hub, tourism facilities, industrial estates orpromoting a knowledge-based economy; each project translates into constructionactivities for local firms that usually consist of a Malay front operation, often withpolitical-administrative connections, and ethnic Chinese junior partners and subcon-tractors. Although many development projects are undoubtedly serious in intent,many others can be challenged in terms of their economic viability. At times,“having projects”—i.e., spending transfers on local construction—seems moreimportant than the eventual use of completed facilities. This raises the impression ofa regional economy focused more on federal transfers and the correspondingopportunities for rent seeking—especially in construction and real estate—than onlocal productive performance.

8 To put things in perspective: the total costs of the new KUKUM are around RM 800 million, thehighway between Kuala Perlis and Changloon RM 400 million, but the total annual revenues of the PerlisState Government are less than RM 100 million.


Institutional arrangements

In contrast to Satun, in Perlis ownership and control of firms is not usually in one hand.The construction and real estate industries comprise three types of firms. The firstconsists of state-owned firms. The public Perlis State Economic DevelopmentCorporation (SEDC) owns a property developer, Perlis Holdings, and a contractingfirm. Each Malaysian state has such a corporation in order to promote economicdevelopment, especially for Bumiputeras, by investment in promising activities.Furthermore, another contractor is directly controlled by the office of the PerlisMenteri Besar (MB, Chief Minister of the State Government). The CIMA cementplant with 300 employees is predominantly owned by the UEM Group, which in turnis part of the investment portfolio of Khazanah Nasional, the federal holding company.Secondly, there are several Bumiputera-owned contracting firms. Thirdly, somecontractors, stone quarries and property developers are owned by ethnic Chineseentrepreneurs. The larger firms among these frequently include one or moreBumiputeras among their shareholders, so as to improve their chances for obtainingpublic sector orders and licenses. This form of inter-ethnic cooperation has beenlabelled Ali-Baba joint ventures (Bardhan, 2005: 195; White, 2004). Personalcapitalism is much less prevalent in the state. According to several interviewees theoverarching goal of the state-owned firms is to provide employment and createmultiplier effects for the regional economy rather than to increase shareholder welfare(i.e., of the Perlis State or Federal Governments). A revealing example is the SEDC,currently the second largest employer in Perlis but burdened by an unfavourablefinancial position. According to the Malaysian Auditor-General (2006), its assetsexceeded liabilities by a factor of merely 1.2 between 2002 and 2004. This shows anorientation in favour of other stakeholders than owners and managers, not unlikeSchmidt’s (2003) account of France’s state capitalism between 1950 and 1980.Moreover, ownership and control are separate in the sense that high-ranking civilservants and politicians are able to fire the managers of the state-owned firms.

The firm survey revealed that inter-firm relations are highly state-led and state-mediated. We cite two examples as illustration: The SEDC has recently commencedon the extensive Padang Besar Development project involving the construction of anindustrial zone, a transhipment centre, tourist facilities and residential areas. Anotherstate-owned company, Perlis Holdings, has been selected as the property developerfor the first phase of the project. The second example is a new strategy in the NinthMalaysia Plan, of transforming Perlis into a Halal Hub (EPU, 2006); another attemptto create a comparative advantage by state intervention. The RM 10 million projectshould make Perlis a processing and marketing centre of foods, pharmaceuticals andbeauty products that comply with Islamic prescriptions.

It is no surprise that private actors in the construction and real estate industriesprimarily look at the public sector. Their aim is to win as many orders as possible. At thesame time, however, the public sector wishes to award orders to state-owned firms,constraining the circulation of money and opportunities beyond the public sector. In thisregard it competes directly with the private sector. The overall results of this publicsector role are that public agencies stand at the centre of the regional economy, thatsupply relations are relatively formal, contractual and impersonal, that the role ofbusiness associations (even the construction association) remains limited, and that


virtually no cooperation and coordination take place among competitors. Instead, firmscultivate close relationships with government and associated agents such as the SEDC,the Public Works Department, as well as civil servants and politicians of the Perlis stategovernment—if possible the MB himself. These institutional arrangements were alsofound to be typical of other industries apart from construction and real estate. By a widemargin, public authorities are mentioned as the most important clients of firmsinterviewed (Andriesse, 2008). Ethnic Chinese construction firms have a specialposition, since the public sector generally prefers to award tenders to Bumiputerafirms. Practising guanxi within the industry does not generate work, so entrepreneurstry to team up with Bumiputera businesses, either in Ali-Baba joint ventures or as theirsubcontractors. Thus, the traditional separation walls between ethnic groups are indeedto some extent breached as a result of state-led and state-mediated inter-firm relations,though not quite in the way intended. Our empirical findings from Perlis with respectto the role of ethnicity match the observations for Malaysia in general made by Gomezet al. (2003).

In addition to inter-firm relations, the government also plays an active role in shapingaccess to finance, albeit with limited success. They obviously support the state-ownedfirms financially, and operate a large number of financial programmes for Bumiputeraentrepreneurs that have not been very effective. The majority of Perlis’s Bumiputeracontracting firms still rely on their owners for start-up capital. Interviews with bankmanagers generated similar results: only 18% of their transactions concerned corporatebanking (as opposed to 42% in Satun). Most problematic is the situation for smallethnic-Chinese contractors. They can not rely on extensive guanxi networks andsimultaneously they face difficulties in obtaining capital from banks as they often lackcollateral. This confirms the observation that personal capitalism can imposelimitations on raising capital (Carney & Gedajlovic, 2001). In fact, small ethnicChinese contractors denied close relationships with Bumiputera firms and the publicsector operate in relative isolation, heavily constrained by the Malaysian state varietyof capitalism. These findings reveal that personal capitalism, particularly the way ofdoing business among ethnic Chinese entrepreneurs, can vary substantially in responseto differences in national contexts.

In terms of distributive equity, a major advantage of the dominant public sector role isthe inclusion of employees into the development process. As an important employer, thissector provides much more social security than enjoyed by the vulnerable employees ofSatun’s seafood cluster. In addition, the many technical colleges established recently as aresult of the knowledge strategy contribute to human capital formation in Malaysia,even if the importance of this contribution cannot be assessed as yet. College graduatesgenerally do not find jobs in Perlis, but in other more prosperous states of Malaysia.Human capital formation in the construction industry is much less important. Thesubcontractors, who are responsible for a large share of the actual construction work,try to cut costs as much as possible and often hire labourers on a temporary basis.

A good indication that the political dimension of institutional arrangementsshould not be overlooked is found in the business strategies of large ethnic Chinesecontractors and property developers. They have found their way to lucrative businessvia Ali-Baba joint ventures and the cultivation of close personal relationships withthe Bumiputera elite. One ethnic Chinese property developer, for example, is close tothe former Menteri Besar (MB) of Perlis, while his brother has managed to befriend


the Raja (King) of Perlis. This mixing of personal links with business interests isalso common practice among Bumiputera firms. Several interviewees claimed thatopen tendering for construction projects is hampered by the MB himself whoallegedly preferred to allocate projects to four associates. Influential “crony”contractors have thus won many bids, including one for the new Perlis Court ofJustice. Similar outcomes in another regional context in Malaysia have beenconvincingly documented in Shamsul (1986).9 In an effort to increase opportunitiesfor smaller contractors Prime Minister Abdullah Badawi has ordered the PublicWorks Department to subdivide large projects among several contractors. This hashad an effect in Perlis. The tender process for the Padang Besar-Changloon highwaywas cut into three parts. Three different contractors are building the highway: onehails from outside Perlis and two are local Ali-Baba joint ventures, one of which isassociated with the MB. The five issues discussed lead to the following institutionalcomplementarities within the Perlis construction and real estate sector: on the onehand, a leading role of the public sector in terms of ownership and inter-firmrelations is accompanied by a low level of interaction, cooperation and coordinationamong private contractors and developers who focus their attention on gainingaccess to projects financed by the Federal Government. Moreover, a relatively goodperformance in terms of regional economic growth and other distributive effects iscombined with doubts about economic efficiency.

Discussion and conclusions

Our findings in Perlis and Satun clearly show the distinctive capitalist settings of thetwo countries involved. This is no surprise, but our study also reveals thatinstitutional complementarities in Malaysia and Thailand have produced ratherdifferent outcomes in terms of regional development in the relatively peripheralregions straddling the international border. Table 4 summarises the main empiricalfindings. Thailand’s variety of capitalism has forged a private-sector-dominated typeof regional economic development in Satun, based on the exploitation of itscomparative advantages by local entrepreneurs organised in national (and interna-tional) value chains. This produces a relatively robust and competitive local privatesector. At the same time, guanxi institutions linking the dominant Sino-Thai businesscommunity tend to exclude the Muslim majority of the population. Muslims arevirtually absent from private sector development in the province, while employmentin the private sector also offers limited perspectives due to the nature of personalcapitalism. Human capital formation outside the realm of family firms appearslimited. This is not much corrected by a public sector that largely refrains fromintervening in regional development, beyond the delivery of infrastructure andsupporting services. This aloofness, together with the gap between the Sino-Thaibusiness community and the Muslim majority, may shed some light on the causes of

9 Unfortunately, more recent sources are not available. The reason is probably that Malaysian authoritiestry to reduce the number of politically sensitive studies. The fact that Shamsul’s publication enjoyed areprint in 2004 is telling for the limited number of other newer studies. In contrast, numerous politicalstudies have been published concerning Thailand, the Philippines and increasingly, Indonesia.


conflict in neighbouring provinces in Southern Thailand, even if conditions there arenot quite the same as those observed in Satun.

In contrast, the economic make-up of Perlis can only be understood by consideringMalaysia’s state-led economic framework—or specifically, the way in which it ismanifest in a peripheral Malay (not just Malaysian!) region. One objective behindmassive investment in public (or public-private) projects is to forge new competitiveadvantages in line with ambitions of turning the economically disadvantaged Malaymajority into an enterprising part of society. This policy has yielded some successes inregional development. It has transformed Perlis from a rural into a more diverse, service-based economy, with higher levels of employment, income and services. However, itremains unclear whether the Malaysian model will ultimately succeed in transformingits peripheries. It was evident in our discussion that state-led development has given riseto considerable rent seeking, while doubts may be raised about the long-term economicsustainability of much public sector investment. Human capital formation may occur,but its impact on the local economy is unclear. Also, some crowding out of private sectorinitiatives and a lesser degree of social capital formation could be observed, which islikely to jeopardise regional development in the longer run.

What, then, are the more general implications of our findings in Satun and Perlis?To what extent does our analysis allow conclusions about the role of institutionalframeworks in regional development, especially in non-core regions in Pacific Asia?In the first place it has been shown that institutional complementarities do play animportant role in setting regions on a particular development trajectory. Our casesdemonstrate that effectively complementing institutions have a much more powerfulimpact than arrangements that evolve in isolation. Thus, development policiesshould aim at promoting positive complementarities in regional economic frame-works. In this respect Hall and Soskice (2001: 45–51) argue that economic policiesare effective “if they are incentive compatible,” i.e., in line with the coordinatingcapabilities embedded in the existing institutional environment. This may soundobvious, but is not always understood when policy makers import “best practice”models from other settings, without considering the match with the local context.

A good example of how differences in institutional environments may affecteconomic behaviour is observed in the operation of the Chinese businesscommunities in the two study regions. The comparison of Perlis and Satun suggeststhat entrepreneurial practices among ethnic Chinese are not as homogeneous acrossSoutheast Asia as put forward by Bjerke (2000), Perry (2003), Yeung (1999) andWeidenbaum and Hughes (1996: 23–61). In our study, networking by Chinese

Table 4 Summary of empirical results.

Seafood industry in Satun Construction industry in Perlis

Ownership and control Coupled SeparatedInter-firm relations Informal networking, guanxi dynamics Formal, contractual, state-ledAccess to finance Easy, banks and kinship ties Relatively difficult, owners/

shareholdersHuman capital formation Limited ConsiderablePolitical dimension Limited to Satun Municipality,

few links with “Bangkok”Bumiputera policies, supportfrom Federal Government


entrepreneurs is conditioned by a rational response to differences in the nationalinstitutional context, namely one that compels them to team up with Bumiputerapartners in Malaysia, and one that fosters guanxi-style cooperation within thecommunity in Thailand.

Beyond institutional complementarities, our findings raise two additional issuesnot adequately covered in much of the literature on capitalist varieties. One is thedistributive dimension of economic systems, and the other issue is that of theirsustainability in the longer term.

Each national variety of capitalism not only defines conditions for economicactivity, but also determines how benefits are to be divided among differentstakeholders. As mentioned, Jayasuriya (2004) conceptualises Asian economies asconsisting of a “mercantilist” growth coalition around the export sector, combinedwith a transfer mechanism (“side payments”) for the benefit of key interest groupsoutside of the leading economic sector. The first component (growth coalition)obviously concentrates on creating optimal conditions for economic performancewhile side payments take care of the distribution of wealth. Although the importanceof distribution issues is fairly widely accepted, much of the literature on capitalistvarieties favours the first question—maximise growth—above the distribution issue.Nevertheless, the comparison of regions in Malaysia and Thailand highlights the keyrole of distribution mechanisms in the definition of their respective nationaleconomic systems. Malaysia emerges as a state-led economic system not becauseof considerations of economic strategy, but due to the political necessity ofaccommodating the aspirations of the Malay majority of its population. AlthoughMalaysian policies often profess to aim at boosting the role of ethnic Malays in thenational economy, they are rather more successful in redressing wealth distributionthan in changing performance. Thus, a relatively peripheral state such as Perlisbenefits from transfer payments by virtue of the ethnic composition of its population(mostly Malays), and not so much as compensation for its peripheral position in thenational space economy. Policies are also more effective in improving income andconsumption levels than in creating competitive advantages in Perlis, as we haveseen. In Thailand, side payments are less conspicuous although they have been usedto cater to the constituents of coalition governments in the past, and in order tomobilise the provincial support base of the Thaksin governments. In comparison toMalaysia, Thailand looks relatively disinterested in redressing economic imbalancesbetween social groups and regions; in this respect it matches Tipton’s (2007)characterisation of Southeast Asian states as relatively weak in social engineering.But then, Thailand’s political constellation is less affected by such wealth gaps.Southern Muslims may see little of the benefits of growth, but their disaffection isseen as a local matter rather than as a threat to national stability—and, thus, does nottrigger a response in the design of economic institutions. This perpetuates theproblem. Creating and maintaining balances—between social and ethnic groups, andbetween the constituent regions of a country is vital for successful economic andsocial models, from an efficiency as well as an ethical point of view. In fact, both theMalaysian and Thai cases show few signs of overcoming imbalances. This brings usto the last issue, that of institutional sustainability.

Institutional complementarities may enhance economic performance and policyeffectiveness; they may also have the effect of locking regional development into a


trajectory that is unsustainable in the longer term. Both of our cases show somedisturbing features in this respect. The Malaysian case depends on transfers from thenational economy that can be sustained in a context of relatively high economicgrowth and the ability of the government to use oil and gas revenues for sidepayments, rather than having to rely on them for its own operations. Such conditionsare not likely to last in the long run. Thus, the challenge is for such regions todevelop local income sources before the flow of funds from Putrajaya runs out. Aswe have seen, however, the economic rationale for much of this investment is indoubt. The emergence of new competitive strengths cannot be taken for granted. TheMalaysian system induces stakeholders to try to gain access to the transfer flows, notto optimise their impact. In the Thai case, unsustainable environmental pressure maywell undermine the current economic model. Unfettered private development offisheries, aquaculture, and tourism may well exhaust the natural resource base beforediversification into other industries has sufficiently progressed. Thailand’s record intaking timely remedial action is hardly encouraging: witness, for instance, theabandoned aquaculture ponds on the Gulf of Thailand coast, poisoned by speculativeshort-term exploitation. Moreover, the socio-economic cleavages observed raiseworries about the social sustainability of the development trajectory. The ethnicconflict in the neighbouring provinces of Southern Thailand is a crude reminder ofthis problem. The disturbing point in both cases is not the lack of balance per se:each economic system probably will prove unsustainable when current trends areprojected into the future. The problem is a lack of corrective mechanisms orcountervailing forces—precisely because of institutional complementarities. Thus, inour view, the sustainability of economic systems, or their ability to adapt, deservesmore attention in the study of capitalist varieties. In doing this, the way in whichdistributive questions are accommodated or ignored is likely to be a major factor.

Open Access This article is distributed under the terms of the Creative Commons AttributionNoncommercial License which permits any noncommercial use, distribution, and reproduction in anymedium, provided the original author(s) and source are credited.

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Edo Andriesse (PhD, Utrecht University) was a PhD Candidate at International Development Studies,Utrecht University, The Netherlands, between September 2003 and November 2007. The research projectwas concerned with a comparative analysis of institutions and regional development at the Thailand/Malaysia border. He now teaches economics at International College, Khon Kaen University in Thailand.

Guus van Westen (PhD, Utrecht University) is Assistant Professor at International Development Studies,Utrecht University, The Netherlands. He teaches a wide range of development and human geographycourses. Furthermore, he conducts research and publishes on regional development in Southeast Asia andIndia. He was also editor of the internationally refereed journal TESG.


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